Utility consumption often has costs above and beyond the flat rate paid for a unit of utility consumption. For example, during hot weather, electrical utility grids are overburdened by heavy air conditioner usage. When brownouts occur, electric motors and other equipment may be damaged. In order to have reserves available for periods of peak demand, utility companies build new plants or upgrade older plants to provide additional electric power generating capacity.
The costs incurred by the utility companies are passed on to consumers in the form of higher rates or surcharges. Utilities may include electricity, natural gas, chilled water, steam, and compressed air. Rate schedules for utilities may be set with two components, a flat rate for consumption, and an additional charge based on peak demand. Sometimes the additional charge to the consumer based on peak demand can amount to up to one-half of the total utility cost, even if the peak consumption accounts for only 10% of the entire consumption.